Tech

H-P expected to see sales, earnings fall in second quarter

DanGallagher

SAN FRANCISCO (MarketWatch) -- Hewlett-Packard Co. is expected to see both sales and earnings decline for its second fiscal quarter, though Wall Street is hoping that the high-tech giant's diversified business will help it weather the economic storm.

After Tuesday's closing bell, H-P
HPQ, -2.35%
is expected to report earnings of 85 cents a share on revenue of $27.5 billion, according to consensus estimates from FactSet Research. That's down from earnings of 87 cents a share -- excluding certain charges -- on revenue of $28.3 billion for the same period last year.

Last year's comparable period did not include revenue from EDS, which H-P acquired during the summer in a deal worth nearly $14 billion.

"We expect weak enterprise spending to translate into soft revenues in PCs, servers and printers offset by EDS-related cost cutting," Chris Whitmore of Deutsche Bank wrote in a note to clients on Monday. "These restructuring benefits will likely enable HPQ to meet consensus EPS and offset weak revenues and margin pressures in other major product segments."

The acquisition of EDS, which provides outsourced technology services to large corporate and government clients, brought H-P a large stream of recurring revenue, which typically remains steadier in economic downturns.

But that is not expected to fully offset the sharp weakness in sales of PCs, services and printers, as both consumers and businesses have tightened their belts.

"We believe PC units were solid but significant downward price/mix could translate into steep PC revenue declines and margin pressure," Whitmore wrote. The PC business accounted for one-third of H-P's total revenue base in its most recent fiscal year.

Some analysts believe the PC business may show some signs of stabilization. Bill Shope of Credit Suisse trimmed his projected sales decline for the PC market last week, citing better-than-expected sales data for the month of March.

"Consumer-centric strength and share gains should allow H-P to post PC-driven revenue upside, but this should be partly countered by continued printing and enterprise pressures," Shope wrote in his report.

Analysts largely expect the company's printing business to be weak. But J.P. Morgan analyst Mark Moskowitz said he expects the company to "eclipse hurdles" related to its printer supply business, mostly by better control of inventory in the sales channel.

Doug Reid of Thomas Weisel went a step further, raising his earnings estimates for the company in a report Tuesday.

"Our improved expectations follow recent industry datapoints that suggest demand has tracked greater than we previously expected in H-P's printer supplies and outsourcing services businesses," Reid wrote. "With strength in these areas, offset by weakness in servers and storage, we expect a favorable operating margin mix shift to result in an Apr quarter EPS beat."

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